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Old 11-30-2007, 11:47 AM
skindog skindog is offline
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Default Moral Hazard problem in a small business

I just stumbled on a moral hazard problem at work, and I'm brainstorming for solutions. I hope a few of you have run into similar situations in your professional careers.

First, some background: I own and run a mid-sized (~60 trucks) over the road trucking company in the midwest. ~55 of the trucks are mine (the bank and I own them, and I simply hire drivers), and 6 trucks are owner-operators (OOs - they own the trucks, pay for the fuel, insurance, etc etc.)

It is much more profitable for me to run my own trucks than the owner operators'. I get whatever I squeeze out of the load with my trucks, but I only get 10% of the gross of the OO's loads, no matter what.

This is where the problem comes exists: dispatchers have an incentive to give more profitable loads to OO, but I have an incentive to give my trucks the more profitable loads. Dispatch talks to OO all the time, and it is not uncommon in the industry for an OO to cough up cash on the side to the dispatcher in order to get better loads. Example: The OO pays $50 to the dispatcher, the dispatcher gives him a load that pays $300 more, and everybody's happy except the owner (me) who is out the extra profit.

I plan on picking up more owner-operators, but am worried about this corruption. I've heard of other companies that have the entire fleet of owner operators paying dispatchers for better loads. Right now I just watch the loads going out and make sure everything's gravy - but I'm trying to build this company so it can run profitably without me.

I've been trying to think of control or incentive systems that can make this scheme seem unprofitable to drivers or dispatchers. I haven't been able to come up with much - either hire a trustworthy manager, give up the hassle free easy cash that comes from having owner operators, or let the corruption run amok. None of these options leave me with much comfort.

I would appreciate any insights you guys might have. I'm not very good at explaining things, so if I didn't make something clear, feel free to ask.
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  #2  
Old 11-30-2007, 12:07 PM
inishowen inishowen is offline
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Default Re: Moral Hazard problem in a small business

Is there a set protocol in place for assignment of loads that the dispatcher is circumventing to illicit bribes or...

Is the assignment of loads solely at the dispatchers discretion, or...

Is there a bid for each load, or...

other?
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Old 11-30-2007, 12:12 PM
Henry17 Henry17 is offline
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Default Re: Moral Hazard problem in a small business

I don't know enough about what is involved with being a dispatcher but is there any way to remove the discretion over who gets what load? Some sort of software that optimizes assignments. That would make giving the dispatcher kickbacks moot since they would be simply administrators with no decision making power.
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  #4  
Old 11-30-2007, 12:18 PM
Quercus Quercus is offline
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Default Re: Moral Hazard problem in a small business

Have the OOs figured the net effect of bribes+better loads into their earnings? Does that make them better paid than the industry average?

If you change the load designations so that they don't get the most profitable loads, will they still earn enough to stay with you? Or will you risk them leaving for something better?

If your own trucks are more profitable than the OOs, why are you looking to increase the number of OOs? Are they profitable enough to generate cash flow to help you increase your own fleet?
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  #5  
Old 11-30-2007, 12:33 PM
skindog skindog is offline
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Default Re: Moral Hazard problem in a small business

[ QUOTE ]
Is there a set protocol in place for assignment of loads that the dispatcher is circumventing to illicit bribes or...

Is the assignment of loads solely at the dispatchers discretion, or...

Is there a bid for each load, or...

other?

[/ QUOTE ]

Right now, dispatchers are the brains of the operation... they talk to drivers/book loads/assign loads/do everything necessary. I've thought of splitting these up, but that will just move the problem - anyone that can assign loads can make extra cash.

Right now, I overlook everything, so there aren't many problems, but I'm thinking about the future.

There aren't many systems in place at this company. I am inheriting it from my parents, and this is one of my biggest concerns/goals as I try to fix things. A lot of things are done the small business way - the way it was most convenient when we had 5 or 10 trucks.
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  #6  
Old 11-30-2007, 12:44 PM
skindog skindog is offline
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Default Re: Moral Hazard problem in a small business

[ QUOTE ]
Have the OOs figured the net effect of bribes+better loads into their earnings? Does that make them better paid than the industry average?


[/ QUOTE ]

They have not. This is not a common practice at my company (yet). My manager/salesman is also very good at booking loads, so we usually have good loads to give out no matter what. I just take the better ones - the difference is anywhere from $100-$500 per load.

[ QUOTE ]

If you change the load designations so that they don't get the most profitable loads, will they still earn enough to stay with you? Or will you risk them leaving for something better?


[/ QUOTE ]

I'm pretty sure they will. I've had owners make 80-90k with my legit loads, so they're not exactly living on scraps.

[ QUOTE ]

If your own trucks are more profitable than the OOs, why are you looking to increase the number of OOs? Are they profitable enough to generate cash flow to help you increase your own fleet?

[/ QUOTE ]

Exactly what you said - they generate cash flow that I don't need, but I like very much. It's a risk/reward thing - I get a lot of money and relatively few hassles compared to my own trucks. I bypass financing, insurance, workers' comp., taxes, etc. etc. etc. - all I have to do is coordinate the shippers, receivers, and OOs and I earn 10% (usually ~$500/week)
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  #7  
Old 11-30-2007, 12:48 PM
skindog skindog is offline
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Default Re: Moral Hazard problem in a small business

[ QUOTE ]
I don't know enough about what is involved with being a dispatcher but is there any way to remove the discretion over who gets what load? Some sort of software that optimizes assignments. That would make giving the dispatcher kickbacks moot since they would be simply administrators with no decision making power.

[/ QUOTE ]

There are too many variables for such software - what kind of load it is, when it needs to be there, the drivers' special needs (doctors' appointments, family obligations, general whining), and a bunch of others that need human discretion.

So a control system of some sort is the only thing I can think of.

Thanks for the idea though! I will look into whether something (maybe simply done) like this is available.
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  #8  
Old 11-30-2007, 01:29 PM
Jimbo Jimbo is offline
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Default Re: Moral Hazard problem in a small business

[ QUOTE ]
There are too many variables for such software - what kind of load it is, when it needs to be there, the drivers' special needs (doctors' appointments, family obligations, general whining), and a bunch of others that need human discretion.


[/ QUOTE ]

There is commercial software on the market that will do this but it might not prove cost effective for you.

Personally I would treat it like I did in my bar business. I know that 75% of my employees were going to steal from me. I added some incentive bonus programs and reduced it to 50%, I fired the worst offenders and made sure the remaining ones knew why. I tolerated the remaining amount of theft as both inevitable and just a cost of doing business. Afterwards I slept well at night and hardly thought about the thefts again other than to monitor the ratio and make sure it stayed in line with acceptable losses.

Jimbo
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  #9  
Old 11-30-2007, 01:35 PM
Henry17 Henry17 is offline
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Default Re: Moral Hazard problem in a small business

Skindog: I know this is a long shot but I know someone in a very similar situation (taking over family trucking business in the Midwest). Any chance you attended Grand View and your family owns a gorgeous cottage on a private island in maskoka?
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  #10  
Old 11-30-2007, 01:35 PM
CrushinFelt CrushinFelt is offline
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Default Re: Moral Hazard problem in a small business

I would immediately fire any and every dispatcher until I found one that would not do this. You can't view it as "oh well that's part of the game." This is your business. They are stealing from you. Why in the hell would you want to employ someone that is stealing from you.

This isn't a moral hazard problem, this is a theft problem.
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